Why do German students reject free money?

Abstract

Numerous eligible German students do not apply for heavily subsidized student aid (BAföG). Our theoretical model shows how imperfect information, risk aversion, debt aversion, and student income can incentivize rational students to abstain from an application. We use GSOEP data from 2001 to 2013 to simulate BAföG eligibility and find that in particular risk averse students with low income are discouraged if they have little information about the application procedure. Moreover, debtaverse students are more reluctant to apply. This suggests that a nontransparent and complicated student aid system disproportionally discourages poor students with little experience with the BAföG system.